Who do I call, RE Attorney? CPA?

Question

All:

I did my first flip earlier this year for proof of concept.  17k purchase, 11k rehab, sold 45k (45k - 28k = 17k pretax profit, no realtor) .  I am finishing my second one, which is going to be about 80k all-in, expected sales price 120k - 130k, I paid for the properties and the rehabbing cash.

Because my current project is not sold, and I intend to continue doing this, Its time for me to address 1031 exchanges,  whether to form an LLC or another entity, and how to properly tax shelter profits.

Should I call an attorney / 1031 place I find through google search?  Do a consult with a CPA?  I am hoping someone can advise on how to get started, and I will be listing my current rehab soon (target July 1st) and need to set up a 1031 now, if that's the right thing to do - I am worried about having ALL of the funds tied up in an escrow account and having a timeline on when I have to make the next purchase, basically not being liquid.

Please advise, hope everyone had a great Fathers Day weekend!

Thanks,

Rob

J Scott · Answer

You can't 1031 a flip...only investment property (i.e., rentals).

As for sheltering taxes, flipping is a horrible tax shelter.  You may be able to save a bit on self-employment taxes (FICA) by creating a properly-structured entity and making a lot of income, but even then, your savings will be small compared to the overall tax hit.

Regardless, if it's taxes you're concerned about, talk to a good CPA or accountant.  If you're concerned about asset protection, talk to a good attorney.  If you're worried about both, talk to both.

But again, if your goal is to minimize taxes, flipping isn't the business to be in...  :-)

Dave Foster · Answer

@Robert Campbell, As @J Scott, and @Nathan Click said very well, if your intent when you purchased that property was primarily to resell it then the property in essence becomes inventory and not eligible for 1031 treatment.  Property that qualifies for 1031 is property that you purchased to ...hold for productive use in business trade or for investment.  There is no statutory holding period.  And intent can change over time.  The overall standard is your intent,  However length of hold is one way to demonstrate your intent.  Actual use, past and current business model an practice, correspondence with your professionals, nature and source of the sale, all can be used to demonstrate your intent.

If you want to mitigate the pain of having to pay ordinary income + self employment on your flips you could adopt a slower model where you buy rehab rent refi re-evaluate your intent and finally 1031 (someone help me with an acronym for 1031 that begins with "r").  You use the refi to access the cash to do your next deal.  And the intent now was to hold for productive use so you can access the 1031 exchange and shelter the taxes using the proceeds to get your 3rd property (property one was your purchase, property 2 your refi).

Your accountant and attorney mitigate risk and craft overall strategy for you.  If you want tax mitigation through the 1031 then a qualified intermediary is who processes those.  Because the QI has to be an unrelated 3rd party to you the 1031 processes and impacts and strategies around that are all the QI can do.  So they are another player on your team in addition to your acct. atty, and financial planner.

Nathan Click · Answer

@Robert Campbell The 1031 was built for investors (buy and hold guys) as a way to allow them to expand their portfolio without being killed bay taxes.  Its just not designed for SFR flippers.  An enrolled agent or a tax lawyer with real estate backgrounds is going to be your best bet as far as gaining a better understanding of the tax laws with regard to real estate.  If you are looking to maximize your return on the flips a quality financing vehicle will do it.  Many flippers expand their buying power and buying velocity with bridge and rehab loans.

Bill Exeter · Answer

Hi @Robert Campbell,

Properties acquired for rehab and then immediate sale ("flipping") do not qualify for 1031 Exchange treatment; only properties that are acquired and held for rental, investment or business use will qualify for 1031 Exchange treatment.  It all boils down to your intent.

Who do I call, RE Attorney? CPA?

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